Proven Financial Stability & Profitability is the primary aspect to look for because you want to buy something that is going to perform, and at the very least has prospects of becoming more profitable due to forecasts of growth.

Diversification of Business income is crucial because it’s too risky to buy a business where the main income comes from one or a few sources. If it is too heavily concentrated in one area, you will have good reason to haggle hard with the seller.

Business Systems & Processes are important because you want to see it is a turnkey operation that isn’t going to take too much time to run efficiency. If it’s a business you want but this isn’t up to scratch, beat them down on price.

Leases, Plant, Equipment & Machinery are important operating tools of any business. If they are run down, make sure you’ve got enough capital to renew these otherwise this alone can put you out of business quickly.

Management & Organizational Chart: you want to see evidence of this with a clearly defined structure indicating limited owner reliance. If you have time to work this out, that’s great, but what you really want is to know it can run without you if it has to.

Buying the shares versus the business- I picked up this great tip from the Author of ‘Your Business Succession’, Leigh Riley, who I met at dinner the other night. Leigh told me that sellers are usually advantaged by selling shares of the company rather than the business, but if you accept this, you need to be aware of the liability factors that could impact you in future. Companies will be held responsible for any of its prior mistakes and if you buy the company that means you will also be impacted adversely. One way to mitigate this risk is to insist the sale terms be accompanied by ‘run off’ professional, product and public liability cover (funded by the seller) to protect your acquisition with insurance.

Exit Planning Prospects for the future – Something else I learned from Leigh Riley was to think about the business exit planning potential for the future because one day you are going to leave the business you are buying and will want to sell it for a maximum price. If it’s a business that few buyers would be attracted due to special interest or skills, you better start thinking about that now, before you buy, so you don’t get caught out and strapped for cash later. Especially, this is important when so many business owners leave due to unplanned events such as Divorce, Dispute, Disability and Death. Make sure the business you are purchasing will be saleable through any circumstances.

Emerging markets have always been perceived as high risk investments. However, over time, the potential payoff could outweigh that risk for many investors. There is a learning curve as countries move into the global market place where, occasionally, major mishaps send investors reeling, driving the market to question the legitimacy of these opportunities and the maturity of the space.

China is one market that is often undervalued because of these fears. Investors often mistrust Chinese companies’ transparency or misjudge the Chinese government’s ability to fine-tune its economy, thus impacting the greater markets valuation.

While it is not a completely unfounded concern, it can be easily disproven with a mild assessment of the company of interest. That is to say that any company is capable of releasing false information, but due diligence and quality control can quickly sort the quality companies from the “bad seeds.” Unfortunately, recent investor attitudes have shown that one sour grape can spoil the bunch, but that needs not be the case.

Consider, for example, Rino International (OTC: RINO). The company’s suspicious activity raised red flags not just among its investors, but across the board – its contracts and earnings just did not add up. What followed was an investigation that halted the company, revealed misstated numbers and led to them being delisted from NASDAQ.

Shareholders suffered a loss of roughly 80% of their investment. At this cost, investors may now proceed with extreme caution, if at all. While this is one way to avoid risk, it is also a way to neglect tremendous opportunity. At an annual GDP growth of more than 9% in the last 30 years in a row since 1980, China’s GDP has doubled every 7 years.

Additional factors that have led to undervaluing of Chinese stock are the misunderstood macro economy. An example of such is that “naysayers” of China have been anticipating China’s sudden economic meltdown in the last twenty years. Reality is that China’s GDP has more than tripled in the last two decades. As China’s economy continues to expand and its population continues to grow wealthier, significant China domestic demand for goods and services naturally turn the country into a huge domestic consumer market – with a population about 5 times as many as in the United States.

Much of such negative perception towards China stems from North American institutional investors’ detachment from China – its language, its culture, and the face-to-face interaction with its companies. A lack of information and the mentioned concerns over transparency and credibility of a company can lead to mispricing.

The opportunity pool in BRIC markets for foreign investors is simply too large to dismiss on weary assumptions.

To mitigate risk and keep the door to China-based opportunities open, consider using the subsequent three tools when considering an investment:

1. Comparison

A starting point for investors interested in the large return potential of China-based companies is to compare how the company is trading between the U.S., Hong Kong and mainland China.

For example, there are a number of companies that are trading at 5 times their earnings in the U.S., while companies in the comparable industries in China are trading at 50 times their earnings. It reflects the need for U.S. sources to gain a better understanding of China’s macro economy and the underlying segments, but – for the investor – it can be a good litmus test for determining which company is a wise investment with a strong potential for future value growth.

2. Research and Due Diligence

Stand-alone, top-line research is not enough when it comes to any form of due diligence, but especially when applied to BRIC investments. Brazil, Russia, India, and China are all hosts to rapid economical growth, flourishing consumer markets, and foreign interest. They are not, however, without risk – as are most companies with a high ROI.

To mitigate loss and maintain a stable, lucrative portfolio, investor institutions must look beyond balance sheets and earning statements. And, therein lies the crux of local-to-foreign investments. One way to determine whether a retail company’s earnings are accurate and whether sales are as promising as stated is to look to its value chain. Is the company ordering quantities of material that agree with its announced sales? Local knowledge and cultural familiarity are often critical to successful due diligence.

3. Counsel

When self-conducted research hits a ceiling and doubt is not completely removed, there are external resources – dealmakers, consulting and advisory firms, and target market experts – to help. Without language barriers, they can speak to the company directly and gain a sense of trust or suspicion. Without culture barriers, they understand the local business, financing and accounting process and can relay the true value to foreign investors.

The emerging markets present tremendous growth opportunities for financial institutions and individual investors alike. It is never too late to travel to some of these countries and experience first-hand what those exciting growth markets are about.

Mr. Benjamin Wey is the President and a founding partner of New York Global Group (“NYGG”), a leading middle market advisory firm on Wall Street specialized in executing China related transactions.

Recently, some investors interested in investing in U.S. listed China based companies have expressed concerns over the occasional discrepancies found in the financial statements between certain Chinese companies’ State Administration for Industry and Commerce (SAIC) filings in China and their U.S. SEC filings. Investors often quickly conclude that the underlying China operating entities must be fraudulent in inflating sales and earnings figures, and that their public SEC filings in the U.S. may not be relied upon for accuracy.

On the contrary, it is highly unusual and it should cause real concern to investors if SAIC filings do match a public company’s SEC filings.

Based on New York Global Group’s 12 year office presence in China and our Chinese language and cultural familiarity, the concerns over SAIC and SEC filing mismatches are overblown and unnecessary. The reason is simple: investors lack basic understanding of China’s corporate registration processes and are comparing very different items. It is important to understand what these documents are, what they are not, and why it would be incorrect and ignorant to allege companies as frauds based on SAIC documents. This article intends to alleviate these concerns based on facts and our extensive knowledge of China. Read the rest of this entry »

Few things have been more current lately than the topic of currency. Instead of zooming into microscopic speculation of various currencies’ isolated impacts onto employment or trade, I would like to first take a step back. In fact, I’d like to step back to the days of bartering, before hard currencies existed. Civilization traded services and aimed to capture economic surplus through specialization of skills and fierce competition. Blacksmiths could trade a well-crafted knife for a pair of finely tailored leather boots. Of course, his neighbor could produce a sharper knife, just like someone else could produce a better pair of boots.

Essentially, the world has not changed very much. But we have added the convenience of currency, which then gave birth to the coining of this “currency war” phrase. If we could think in friendlier terms, the current situation of global trade may be better described as an arm wrestling contest. The judges want to know which nation is strongest, though any victory would be a celebration of human progress and strength. Whether their strengths are measured by lifting dumbbells, an intermediary object much like currency, the final deciding stage is an arm wrestling match of direct hand-to-hand combat. Read the rest of this entry »

Until the recent financial crisis that shocked the Western world, few people believed that the Chinese banks were comparable in strength to their U.S. counterparts. However, during the global financial crisis in 2008 and 2009, while U.S. based global banking franchises scrambled to raise capital in order to stay afloat, often through diluting their shareholders, China’s major banks were not only solvent but were also prosperous and able to demonstrate high earnings growth at the height of the financial crisis. During the difficult period, the Chinese economy stood out as one of the few stabilizing factors in the economic world. With strong, massive balance sheets, Chinese banks played a critical role in providing the necessary “capital fuel” to support China’s billions of dollars in infrastructure projects and other incentive plans allowing China to continue to advance ahead with its economic development, liberating hundreds of millions of people out of poverty.

What have Chinese banks done differently from Western banks that brought upon such vast differences – one side churning out profits while the other standing on the brink of bankruptcy? The answer is simple: Chinese banks follow the traditional banking model – a financial institution that takes in deposits and provides loans, a simple business model. The Chinese bankers are the “old fashioned” bankers. Many Western banks however, are interested in pursuing faster and higher risk profits generated from derivatives trading. Many Western banks were not and are still not focused on making money from a conventional business model such as the traditional commercial banking of loaning money to qualified borrowers. In this day and age, it is not difficult to imagine that a prestigious college graduate would refuse a career as a loan officer. The fanfare of fast paced Wall Street deals and deal making continues to attract some of the brightest minds to the industry. In other words, Chinese banks serve the economic need of borrowing and lending money while Western banks serve Wall Street’s forever insatiable appetite and relentless pursuit of profits despite higher risk profiles that have doomed many.

When a Chinese bank approves a loan, the bank carries the note on its books against its own capital thereby reducing its ability to extend more loans since the outstanding loan already counts against its capital reserve. That’s the traditional approach in commercial banking. A Western bank however decides that once a loan is made and fees are collected, it wants to move the loan off its balance sheet so that the bank could provide more loans and collect more fees from new borrowers. That’s when “securitization” comes in – a process in which a loan is divided into pieces and sold to investors just like stocks. These smaller pieces of the same loan are then each separately rated by credit rating agencies and each piece is assigned an investment rating. Investors such as pension funds and other institutions that buy these securitized loan products often require minimum investment grade ratings since it is broadly believed that the due diligence work performed on these products by accredited rating agencies can be trusted. Holders of these securitized products often hold them over time while hoping to receive regular loan interest payments from the underlying loans. Read the rest of this entry »

No one can deny the significant opportunities that exist in the Chinese market. With average growth rate of 10% in the past 30 years, China, the world’s fastest growing major economy has just surpassed Japan as the world’s second largest economy.

The possibility of surpassing the United States, the world’s current largest economy by as early as 2030, shows that the strong growth in China in the next 20 years is very real. Nominal GDP in 2009 for China was $4.9 trillion, about 8% of global GPD, and in the U.S was $14.3 trillion, about a quarter of the global GDP.

The China market, with its 1.3 billion Chinese consumers, one of the highest savings rate in the world of over 30% of household disposable income, have become an area of opportunity that cannot be ignored by any foreign company that wants to compete in the global platform. Currently the world’s fifth-largest consumer market behind the U.S, Japan, UK, and Germany. China is also the world’s largest exporter and second largest importer of goods. In 2009, China overtook the U.S as the world’s largest auto market selling approximately 13.6 million vehicles. China’s fast growth has also created an abundance of wealth. According to Hurun Rich List in October 2009, China has 130 billionaires, second ranked only second to the U.S by number.

Large U.S companies have definitely not been waiting to grab a piece of China’s fast growth. Companies such as Apple, Ford Motors, Nike, Heinz, and the Gap have all taken actions to expand in China, Starbucks and Coca Cola continue to view China as top growth markets, and General Motors have already invested billions in China since a decade ago. According to the U.S –China Business Council, foreign direct investment (FDI) from the U.S in China was up to $3.6 billion last year from the $2.9 billion invested in 2008. In the first half of this year, total FDI in China has already climbed 20% to about $51.4 billion (China’s Ministry of Commerce). Read the rest of this entry »

As a well recognized market leader in China and on Wall Street in the China related middle market advisory space, our firm New York Global Group has been advising China based corporate clients with their strategic growth in the last 17 years. The foundation of our business success lies in our ability to truly understand China and China related transactions in the same cultural environment as Chinese CEOs do.

Despite a large deal flow, less than 2% of all China based companies reviewed by NYGG have passed the firm’s rigorous client acceptance process. NYGG’s local presence in China provides the firm with the latest intelligence on Chinese companies on an ongoing basis.

The fundamentals of a business and more importantly, the integrity of a management team determine its stock performance over the long run. Can lawyers and accountants give investors assessment on the integrity of a company’s management team? The answer is No. That’s part of what NYGG does – we bring to our clients the “human due diligence” in addition to extensive accounting and legal reviews on projects which we support.

Cultural Understanding is Critical to Successful Investing:

NYGG staff meets with several hundred Chinese companies each year across many sectors. Through these meetings, we often gain insightful knowledge in many industries by speaking directly to Chinese CEOs and other leaders. We speak to them in the same Chinese language and we truly understand them since we share the same Chinese culture. Therefore, we believe New York Global Group (NYGG) has the ability to read into the “minds and hearts” of a Chinese CEO and conduct “human” due diligence – far more real and extensive than any desktop accounting or legal reviews. It is all about getting to know the people involved. Read the rest of this entry »